An Asymmetric and DCC Analysis of Two Exchange Rate Market Returns: An Evidence Study of the Japan and the Korea's Exchange Rate Markets

Abstract

The empirical results show that the dynamic conditional correlation (DCC) and the bivariate EGARCH (1, 2) model is appropriate in evaluating the relationship of the Japan and the Korea's exchange rate markets. The empirical result also indicates that the Japan and the Korea's exchange rate markets is a positive relation. The average estimation value of correlation coefficient equals to 0.288, which implies that the two exchange rate markets is synchronized influence. Besides, the empirical result also shows that the Japan's exchange rate market does have an asymmetrical effect, but the Korea's exchange rate market does not have asymmetrical effect. And the Korea's exchange rate market return also receives the influence of the Japan's exchange rate return's volatility. Based on the papers of Nelson (1991) and Engle (2002), the bivariate EGARCH(1, 2) model with a DCC has the better explanation ability compared to the traditional bivariate GARCH(1, 1) model.